UBS Bid to Dismiss FHFA Mortgage-Bond Suit Denied

By Christie Smythe and Bob Van Voris -
Apr 5, 2013

UBS AG (UBSN) lost its appeal of a ruling
that allowed the Federal Housing Finance Agency to continue
pursuing legal claims against the bank over the quality of loans
tied to $6.4 billion in mortgage-backed securities.

UBS, Switzerland’s largest lender, alleged that the suit
was filed too late under federal law. The U.S. Court of Appeals
in Manhattan ruled today that the Housing and Economic Recovery
Act of 2008 extended the filing period for such suits, affirming
a May ruling by U.S. District Judge Denise Cote in Manhattan.

“As HERA makes clear, Congress intended FHFA to take
action to collect all obligations and money due” to government-sponsored Fannie Mae (FNMA) and Freddie Mac (FMCC), the judges said in their
opinion. “Congress obviously realized that it would take time
for this new agency to mobilize and to consider whether it
wished to bring any claims.”

Megan Stinson, a spokeswoman for UBS in New York, didn’t
have an immediate comment on the appeals court’s ruling.

FHFA alleged that Zurich-based UBS misrepresented the
quality of loans underlying $6.4 billion in residential
mortgage-backed securities purchased by Fannie Mae and Freddie
Mac, according to the opinion. FHFA was appointed conservator of
the mortgage financiers in 2008.

Test Case

The case is one of 17 filed by the FHFA against major
financial institutions over alleged misrepresentations regarding
mortgage-backed securities totaling more than $200 billion,
according to briefs filed in the appeals court. Of those, 15 are
currently before Cote, who designated UBS’s bid for dismissal as
a test case, according to a joint brief filed by the other
banks.

The lenders, including Bank of America Corp., Barclays Plc
and Citigroup Inc., told the appeals court in their November
brief that Cote’s decision was erroneous and would have
“enormous impact” on financial institutions by increasing
their exposure to state and federal securities claims.

In a separate brief filed in September, the Securities
Industry and Financial Markets Association said the district
court’s ruling expanded the scope of time-limit provisions in
the housing recovery law beyond what Congress intended.

‘Plainly Drafted’

“SIFMA’s members and other market participants rely on the
application of the securities and other laws as they are plainly
drafted,” the group wrote. “When courts rewrite statutes based
on intuitions as to what Congress would have preferred to have
said, uncertainty and arbitrary decisions result.”

The U.S. Justice Department argued that lawmakers “reset
the limitations clock” on the securities claims when they
passed the housing and economic recovery act. The law provided
for the creation of the FHFA, which was intended to help fix
financial troubles at Fannie Mae and Freddie Mac caused by the
housing crisis and the plummeting values of its mortgage-backed
securities, according to a brief the department filed in
November.

“Congress specifically contemplated the FHFA would bring
litigation on behalf of the entities for which it acted as
conservator, and took steps to ensure that the new agency would
have adequate time to do so,” the Justice Department said in
the filing.

‘Grossly Inequitable’

Separately, the banks in all 15 cases in Cote’s court filed
a request with the U.S. appeals court March 26, claiming her
pretrial rulings created a “grossly inequitable, clearly
erroneous framework for litigation” in what they called
“perhaps the largest collection of securities litigations ever
filed in the United States.”

The banks argued that Cote wrongly denied them the ability
to seek evidence on many potential legal defenses, including
what Fannie Mae and Freddie Mac knew about the practices of loan
originators whose mortgages backed the securities involved in
the suits.

Some of Cote’s “gravely prejudicial” rulings were aimed
at pressuring the banks to settle, they said in court papers.

The case is Federal Housing Finance Agency v. UBS Americas
Inc., 12-03207, U.S. Court of Appeals for the Second Circuit
(Manhattan).